3. Consider an economy with a current inflation rate that is higher than 8% and a...
3. Consider an economy with a current inflation rate that is higher than 8% and a NAIRU unemployment rate of un= 6% (0.06). The short run Phillips curve is π=Eπ−2(u−un)Assume that Okun’s Law holds so that a 1 percentage point increase in the unemploy-ment rate maintained for one year reduces GDP by 2%. Consider a one-year reduction in inflation.
(a) If that year, Eπ= 0.08 and π = 0.04, what is the unemployment rate? By what percentage does output grow?
(b) If that year, Eπ = 0.04 and π = 0.04, what is the unemployment rate? By what percentage does output grow?
(c) Explain why your answers to (a) and (b) differ.
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3. Consider an economy with a current inflation rate that is
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Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation, and Yn...
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6.
7.
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6.
7.
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